World Corporate Risk Reaches Peak Levels

Increasing numbers of emerging markets included in the "extreme" and "very high" risk categories

Three leading world economies become fragile: China, USA, Japan

China hampers activity in several Asian countries

Europe facing positive dynamics, but political risk driven by the Brexit must be monitored

WORLD ECONOMY FACING "JAPANESE-STYLE" GROWTH TRAP

The global situation has deteriorated slightly since Coface’s March forecast, with growth expected to remain below 3% in 2016 for the sixth consecutive year. Companies have been penalized by this torpid "Japanese-style" environment: a lack of opportunities and reduced pricing power as a result of weak inflation. The clear increase in corporate risk around the world has been confirmed by Coface’s latest country risk assessments[1]. The average assessment for all 160 countries has reached a peak level, unseen since the early years of the century, corresponding to B, "significant risk" level.

A shock wave caused by the vulnerability of the United States and China

The world's three largest economies have been affected by aggravated credit risk. After the downgrade of Japan to A2 last March, it is now the turn of the United States and China, downgraded to A2 and B, respectively.

In the United States, companies are facing cyclic problems. The post-crisis recovery point has been reached and now business insolvencies are rising for the first time since 2010. Although the unemployment rate has been continually dropping, companies are facing falling profitability and reduced investment levels.

In China, despite stable growth, stimulus measures are proving to have a limited effect due to overcapacity and excessive corporate debt levels.

Unsurprisingly, this shock wave is spreading, to Canada on the one hand, downgraded to A3, and to several Asian countries on the other hand. For this reason, the assessments of South Korea, Hong Kong, Singapore and Taiwan have been downgraded to A3, and Malaysia to A4. These countries suffer from strong exposure to the Chinese structural slowdown for exports, tourism and investments. Furthermore, volatility on commodity markets, including oil, is penalizing corporate business.

Investment is climbing in Europe, however, political risks are increasing

Political uncertainty in Europe is weighing on the confidence levels of businesses and households. Following the Brexit vote, Coface has revised its growth forecast for British GDP by 0.6 points, to 1.2% for 2016. On a long-term basis, a "Norway-style" free trade agreement appears unlikely after the resignation of David Cameron and, if WTO rules are applied, the economic cost could be high for the United Kingdom and the EU. British export sectors, tied to the EU by supply chains, could be penalized by customs duties. Within the EU, countries with a limited domestic market and significant commercial relations with the United Kingdom face the highest level of exposure: Ireland, and to a lesser extent, the Netherlands, Belgium, Denmark and Sweden.

At the current time, no effect is expected on the healthy dynamic growth within the Eurozone (forecast at 1.7% in 2016), fed by both household consumption and private investment. Relaxed budgets, decreased oil prices and the low European Central Bank rates have had positive effects on business margins. Small businesses are benefiting from a wider range of bank loan services for the first time.

France has been upgraded to A2, in response to several encouraging signs - the highest level of business investment in the last 4 years, a boost in the construction sector (which represents 5% of GDP), and a constant drop in the number of insolvencies estimated at -3.2% in 2016.

Italy has been upgraded to A3,due to falling levels of insolvency and unemployment and increased investment.

Central Europe lies in the positive wake of Western Europe, with upgraded assessments for four countries: Lithuania (A3), Slovenia (A3), Latvia (A4) and Romania (A4), which are taking advantage of solid growth and reduced export dependence on Russia.

Continued considerable impact of falling oil prices

The effects of the fall in oil prices is continuing to be felt within oil-exporting countries.Saudi Arabia (new ratingB), Kuwait (A3), Qatar (A3) and Algeria (C) have seen their public deficits expand and non-hydrocarbon business slow. This also applies to Angola (D) and Zambia (D), subsequent to the depreciation of their local currency due to the Chinese slowdown and the collapse in commodity prices, and Mozambique (D), facing a highly probable payment default.

In this context, Coface has introduced an eight assessment category: E for "extreme risk." This addition will add granularity to the country risk analysis. Some countries with a D assessment will now be allocated the new E category, a synonym for extremely high credit risk. These countries are Afghanistan, Armenia, Central African Republic, Cuba, Eritrea, Iran, Iraq, Libya, Sudan, Syria, Timor-Leste, Venezuela, Yemen, and Zimbabwe.

[1] Coface's country risk assessments reflect the average credit risk by companies in a given country, on a scale of 8 levels: A1, A2, A3, A4, B, C, D, E, in increasing order of risk.